Franklin Resources

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 4/5

Franklin Resources is a global investment management company, offering a diverse range of investment strategies and solutions to both institutional and individual clients, operating in a very competitive sector, with its main goal being to create long-term value.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

The company manages various investment products spanning across equity, fixed income, multi-asset, and alternative strategies.

Business Overview

Franklin Resources, commonly known as Franklin Templeton, is a global investment management firm with a history dating back to 1947. The company manages investments for both retail and institutional investors worldwide, including individuals, institutions, and sovereign wealth funds. The company’s diverse investment offerings include mutual funds, ETFs, separately managed accounts, and other investment vehicles.

Their investment products are distributed through various channels, including independent financial advisors, direct retail investors, and institutional relationships.

  • Revenues: The majority of the revenues for Franklin Resources come from investment management fees, with distribution and other income streams contributing a lesser portion. Investment management fees are primarily driven by the average AUM and fee rates charged to client assets. In recent years, the company has diversified its revenue stream by expanding into multi-asset and alternative strategies, generating revenue streams that are not dependent on pure equity or fixed income assets under management.
  • Industry Trends: The asset management industry is experiencing significant changes, such as a shift toward passive investing, increasing competition among providers, and greater regulatory scrutiny. In the current economic environment, factors like higher inflation and rising interest rates tend to decrease the risk appetite for retail investors and negatively affect AUM of investment firms. Furthermore, the shift to passive investment means that investors are flocking to ETFs, which usually have a lower fee than actively managed products. This causes a headwind for asset management companies that rely on management fees.
  • Margins: Operating margins for asset managers tend to be quite high, but they also depend heavily on market conditions and the level of asset management. Companies typically attempt to maintain margins through a combination of factors like optimizing management and overhead costs, and by leveraging digital initiatives to increase profitability by more effective distribution of the products, but can be limited by competition and increased regulatory costs.
  • Competitive Landscape: The investment management industry is highly competitive, with numerous players including large global asset managers, smaller specialist firms, and passive investment providers. Price competition is significant, as low-cost ETFs and other passive investment options pressure active management fees. Size and reputation play a big role in investor choices, so larger companies such as Vanguard, Blackrock, and Fidelity have an inherent advantage to attract investors.
  • What Makes the Company Different: Although Franklin Templeton has scale and a well-established brand, its primary differentiating factor lies in its ability to provide diverse active strategies, particularly in areas of high-growth potential such as the emerging markets, and to achieve consistent investment performance by following a disciplined and global investment process. Additionally, they are working on offering private wealth management through their recent acquisition of Putnam. Also, Franklin is focusing on building new technologies for distribution and making their investment products more accessible. Also, their investments in alternative funds can be seen as a strategy that differentiates them from other pure-equity and fixed income players in the industry.

Financial Analysis

Recent financials have shown a mixed performance with both tailwinds and headwinds

Income Statement:

  • Revenues: Franklin Resources has shown strong revenues in 2021, 2022 and 2023, which is highly correlated to how the stock market performed during those periods. The revenue has seen a significant increase of around 7 percent in 2023. As the main revenue generator is the AUM, this indicates a positive market. On the downside, the company’s revenues are susceptible to volatility in the market.
  • Operating Income: Operating margins for the company have seen moderate variations over the years, ranging from 22-34%, a trend that is common in the asset management industry. An increase in technology spending for improving operations may cause some headwinds for operating margins, and a larger number of employees or compensation will reduce profitability.
  • Net Income: The company’s net income has seen some yearly variation, correlating with the market. Despite revenue increases, they have seen a fall in net income during fiscal years 2021, 2022, and 2023. This indicates a compression in margin and higher costs.

Balance Sheet:

  • Cash and Cash Equivalents: The company has a good level of liquid assets. In the most recent quarter ended at September 2023 they have had around $3.9 billion in cash and cash equivalents. A high cash balance can provide good downside protection to the company and allow them to seize investment opportunities in the future.
  • Goodwill & Intangibles: The company has a good amount of goodwill and intangible assets, but they are mostly a product of acquisition.
  • Liabilities: The liabilities are well managed with the debt side being relatively low, while the equity portion is strong at around $12 billion.

Given the relatively low debt and good cash balance, the balance sheet seems robust.

Earnings Calls Highlights:

  • Acquisitions and Strategic Moves: Franklin has been actively seeking new avenues of growth through acquisitions such as O’Shaughnessy Asset Management, Putnam Investments, and Lexington Partners. They’ve also initiated a series of partnerships to increase their reach. A large amount of money is being allocated to mergers and acquisitions and they have a dedicated corporate team for this.
  • Share Buybacks and Dividends: Management has indicated that they’ll continue to buyback shares in the coming quarters. This indicates a confidence in the company’s future financial prospects, however, these buybacks may not be value-creating if they buy when the market is overvalued. They’ve also shown commitment to dividends.
  • Cost Management: Given the turbulent market, management intends to cut costs and increase efficiency. They have reduced their workforce, and are aiming to increase profitability in a high inflationary, volatile market.

Moat Analysis

  • Intangible Assets: Brand recognition in the financial world matters to a certain extent, but as most of their products are managed in investment funds (ETFs, mutual funds etc) and where the investment decision is primarily made by financial advisors or institutional managers, a wide brand name like Franklin can only help so much, rather than create a significant difference. They have been in business since 1947, so brand helps somewhat but is not particularly strong when compared with the top investment houses like Blackrock and Fidelity. While they have been managing investment funds for a very long period of time, there isn’t any special track record that would make them especially better than their competitors.
  • Switching Costs: Switching costs for investment management are not particularly high, as it isn’t too cumbersome for a manager to change funds, or for clients to switch to different firms if they feel their investment returns could be higher. With the rise of low-cost investing, customers seem more likely to choose the funds with the lowest fees, rather than any other factor.
  • Network Effects: Network effects are primarily limited to the Institutional side, which may give Franklin some edge, but they are not a significant factor as most retail investors will not be directly impacted by the network of managers at Franklin.
  • Cost Advantages: They may have a slight advantage due to economies of scale and size, with many employees, but the barriers to entry to the asset management industry are not too high, as a single manager can set up an investment firm, which means scale-based cost advantages aren’t an extremely reliable source of a competitive advantage.

Overall, Franklin resources has a narrow moat, that is primarily built upon their brand recognition, and a wide investment network that spans globally.

Risk Analysis

Although they have a long track record and a decent global business, several important factors can negatively impact their business

  • Market Volatility: Fluctuations in the market directly affect their AUM, thus directly impacting revenues and overall profitability. They can have less AUM when markets fall or when investors tend to pull out cash in order to invest in other areas.
  • Increased Competition: There is fierce competition in the investment industry, which means companies are constantly required to reduce fees, which will have an impact on revenues. Furthermore, there is a massive growth in the passive investing segment, which can reduce AUM from active management funds.
  • Regulatory Changes: Any major regulatory changes can have a major impact on operations, profits and strategies. Regulations are constantly increasing, and with an ever-changing landscape, Franklin Resources will have to be quick on their feet to adapt.
  • Economic Recessions: As the economy cools down and goes into a recession, many retail investors tend to sell their stocks and increase their risk aversion. This can impact the market directly, and also the AUM of Franklin Resources, which will have a direct impact on revenues.
  • Management Execution: Franklin Resources has expanded rapidly through acquisitions in the past few years, whether or not they can fully execute on these acquisitions will be essential for growth in the future. There is a risk that acquisitions do not provide their stated synergies and lead to further issues for the company.
  • Investment Performance: Any underperformance against the market or its peers will impact investor confidence. And investors could move assets to other firms if Franklin’s performance lags for a long period of time.

Understandability: 3 / 5

While the core business model—managing assets for clients—is relatively straightforward, the complexity of financial instruments, the intricacies of different investment strategies, and the impact of regulations can make understanding the nuances of the business challenging.

Balance Sheet Health: 4 / 5

The company’s balance sheet is relatively healthy with a solid level of cash and moderate debt. However, high amounts of intangible assets can cause a drag on overall value. Furthermore, debt-to-equity ratio will need to be reduced in the coming years in order to improve financial health.